Maryland Governor Misstates State Tax Comparisons

Maryland Governor Martin O’Malley’s office, attempting to refute criticism from the new group “Change Maryland,” today authored a blog post entitled “The Facts,” in which he makes inaccurate assertions about Maryland’s tax system.

The post seeks to demonstrate that Maryland’s tax system is not as bad as Change Maryland and others suggest. The Governor’s blog post does so in part by relying on our data at the Tax Foundation, citing some numbers that show Maryland competitive in certain narrow areas. We’ll address those shortly, but we must note that this misses the forest for the trees: Maryland’s tax structure – sales, corporate, and personal income – makes them near the bottom of the heap for tax system competitiveness as a whole; our 2012 State Business Tax Climate Index ranks them 42nd out of 50 states. (They were in the 20s a few years ago.) Maryland’s tax structure is not competitive generally, and getting worse.

Now, to “The Facts:”

Maryland’s sales taxes are, at best, middle of the road

The Governor’s blog writes: “[A]ccording to the Tax Foundation, when you factor in all of Maryland’s sales tax exemptions, Marylanders pay the 9th lowest adjusted state and local sales taxes in the nation”

The cited statistic refers not to sales tax payments or rates, but sales tax structure. It is true that we find Maryland’s sales tax structure to be 9th best in the nation: one of the few bright spots in a problematic tax system. However, Maryland has the 16th highest state sales tax, the 36th highest (15th lowest) when you include local governments –more middle of the pack. Combine a middle rate and a broad base, however, and Maryland ends up with the 29th most sales tax collections per capita. Again, the middle of the pack.

The blog post has this inaccurate chart of "neighboring" state and local sales tax rates:

Three problems with this table:

First, Delaware is missing, despite sharing about a 100 mile border with Maryland. (Delaware has a zero sales tax, so leaving them out eliminates a bad comparison.)

Second, Pennsylvania’s local tax rate is overstated: the average local sales tax is just 0.34%, not 2%, so the combined rate is 6.34%, not 8%.

Third, and most problematically, the Virginia rates are just plain wrong. Virginia has a uniform 5% sales tax, not 6.5%.

A correct table appears below:

State

Combined State + Avg. Local Rate

Maryland

6%

Delaware

0%

Virginia

5%

Pennsylvania

6% + 0.34% average local rate

West Virginia

6%

District of Columbia

6%

Source: Tax Foundation.

Far from being competitive, again Maryland is at best in the middle of the pack among its neighbors. The blog cites a report which places Maryland as 3rd among states in sales tax which says that Maryland has the third lowest rate after “adjusting for income,” whatever that means. We would caution this with two points: first, if it’s relying on the data he has already provided, it could be wrong, and 2) there is no indication that this adjusts for cost of living; Maryland, for example, as the 15th highest housing price, according the census. In other words, Maryland may have high incomes, but it also has a high cost of living, a reason to be skeptical of this adjustment.

“Lastly, the TaxFoundation also finds that Maryland has the 8th lowest tax burden on mature businesses”

On this point (from our Location Matters study) he is correct, but he omits that Maryland also has the 46th worst tax burden for new businesses (p. 109).

Don’t lose sight of the fact that this is cherry-picking data.

Maryland is somewhere in the middle of the pack for sales taxes, and somewhere near the top for mature businesses and bottom for new business. But for overall tax structure, Maryland is near the bottom: an unfriendly 42nd out of the 50 states.

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